UK Oil & Gas Investments (LSE: UKOG) has undoubtedly been an exciting company to cover over the last few years.
In 2016, the company made headlines after testing at its Horse Hill development produced the highest flow rates of any onshore wildcat well in the UK. Then in 2017, canny investors who bought into the story saw the value of their shares rise eight-fold as excitement around Horse Hill grew.
Unfortunately, since the shares peaked at 9p last September, investment returns have proved disappointing because development there has slowed.
The main problem is that while the company is working hard to unlock value from the so-called Gatwick Gusher, flow testing has been disappointing. As my colleague Alan Oscroft has pointed out, oil is flowing from the wells drilled at decent rates, but only for relatively short periods at a time.
Time for a turnaround?
UKOG has suffered some setbacks, but management isn't giving up just yet. One of the most significant issues the company currently faces is its level of cash burn. Drilling for oil and gas isn't cheap, and the business has been relying on the kindness of investors to keep the lights on while it tries to develop the Horse Hill prospect.
However, I believe that the latest flurry of deals over the past 30 days has put the business in an extremely advantageous position. UKOG has now raised £12.5m since the beginning of June, enough cash to see it into 2019. By this point, we should have more clarity on the firm's production prospects.
And we could have more good news on this front relatively soon. Last week, UKOG said Horse Hill Development Ltd, the operator of the Horse Hill-1 oil discovery, has started planned flow testing operations of each of the Kimmeridge Limestone4 and KL3 oil pools. This "comprehensive long-term production testing campaign will provide the necessary data to fully assess Horse Hill's Portland and Kimmeridge commerciality," according to chairman Stephen Sanderson.
A lot is depending on the results of these tests. If oil flows as expected, I believe UKOG's share price could really take off as investors buy back into the Horse Hill story. Even though there will still be plenty of work to do to make the prospect commercially viable if the flow testing is a success, proving that the oil in the ground is indeed recoverable should reignite interest from investors. I can see the scent of profits also leading to increased institutional demand.
So, will I be buying UKOG now that the company is on the cusp of a transformational change in fortunes? The answer is, not yet. While I would certainly not write off UKOG as an investment, I believe that at this point the risk/reward balance is off. I'd like to see more concrete evidence that Horse Hill is a viable oil asset before buying into the growth story.
With a comprehensive long-term production testing campaign already underway, it may only be a matter of time before management can provide this confirmation.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.